hora et al 1997

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International Accounting Standards inCapital Markets

Judith A. HoraRasoul H. TondkarAj ay Adhikari

Capital markets have become increasingly globalized due to advances in technology and com-munications and the growing trend of national governments initiatives to deregulate theircapital markets. Globalization of the worlds capital markets necessitates the nee for compa-rable and reliable financial information to support the varied transactions and operations ofthe markets. Regulatory initiatives have been undertaken at the national, bilateral, regional,and international levels to deal with the problems created by diversity in accounting reportingin international capital markets. This paper discusses the progress and impediments faced ateach level in attempting to harmonize accounting reporting requirements, describes interac-tions between regional and international harmonization efforts, and suggests the most desir-able and feasible course of action to achieve global harmonization in international capitalmarkets. Efforts of the International Accounting Standards Committee (IASC) and the Inter-national Organization of Securities Commissions (IOSCO) have focused on a common goal-h ving financial statements used in cross-border listings prepared in accordance with inter-national accounting standards as an alternative to national accounting standards. Althoughno international mechanism exists for enforcing the accounting standards of an internationalbody, IOSCO is the most likely organization to implement conformance.Key Words: harmonization: international capital markets: interactions between regionaland global harmonization efforts; IOSCO; IASC.

In the last decade, capital markets have become increasingly globalized dueto advances in technology and communications which have effectively linked the

J udith A. Hora and Rasoul H. Tondkar Virginia Commonwealth University, Richmond, VA23284-4000. Ajay Adhikari The American University, Washington, DC 20016-9044.J ournal of International Accounting Auditing Taxation, 6(2): 17 I- 190 ISSN: 1061-9518Copyright 0 1997 by JAI Press, Inc. All rights of reproduction in any form reserved.

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172 INTERNATIONALACCOUNTING,AUDITING TAXATION,6(2) 1997

markets of the world. Due to the growing trend of national governments to dereg-ulate their capital markets, investors are increasingly interested in foreign equitiesas a means of enhancing investment performance (Choi and Levich 1994). Glo-balization of the worlds capital markets has brought to the forefront the increas-ing need for comparable and reliable financial information to support the variedtransactions and operations of these markets.

Diversity in accounting reporting (defined as measurement, presentation, anddisclosure) affects capital market participants. In an extensive survey of capitalmarket participants, i.e., investors, corporate issuers, investment underwriters,market regulators, and rating agencies, almost one-half of the respondents statedthat their capital market decisions were affected by accounting diversity (Choi andLevich 199 1b). In the absence of comparable accounting principles and disclosurepractices, analyzing foreign financial statements is difficult for investors. Forcompanies seeking to raise capital in foreign markets, complying with foreign dis-closure and reporting requirements often becomes a cumbersome and costly pro-cess. For regulators faced with the dual responsibility of protecting domesticinvestors and attracting foreign companies to the domestic market, developingreporting and disclosure requirements for foreign companies becomes a fine bal-ancing act.

Regulatory initiatives have been undertaken at many levels to harmonizeaccounting reporting requirements in capital markets to facilitate cross-border list-ings. The purpose of this paper is to review recent developments in efforts to har-monize accounting reporting requirements, particularly those pertaining to theharmonization of global stock exchanges.

RESPONSESTOACCOUNTINGDIVERSITYINCAPITALMARKETS

Attempts to alleviate the problem of diversity in accounting reporting inthe capital markets are currently being made at the national, bilateral,regional, and international levels.* This paper discusses the progress andimpediments faced at each level in attempting to harmonize accounting report-ing requirements in capital markets by analyzing specific examples from theU.S. (national level), Canada-U.S. (bilateral level), African Accounting Coun-cil, the Association of Southeast Asian Nations, and European Union(regional level), and the International Accounting Standards Committee (inter-national level). While there are other countries and organizations engaged inpromoting harmonization, the above examples were selected because they rep-resent some of the more prominent initiatives at each of the levels. The paperconcludes with a discussion of the interaction of harmonization efforts at thedifferent levels.

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173

National Level-United States

Competitive pressures have forced capital market regulators in many coun-tries to reassess accounting reporting requirements for foreign issuers in an effortto attract foreign listings. In 1986, the Securities and Exchange Commission(SEC) allowed the New York Stock Exchange (NYSE) to modify its interim-reporting requirement by pe~itting foreign companies to file inte~m-repo~s on asemiannual rather than on a quarterly basis as required of U.S. companies. Morerecently, in an effort to reduce reporting burdens for foreign companies, the SECadopted initiatives which (a) extend the time periods for updating financial state-ments; (b) allow foreign registrants more ~exibility when selecting reporting cur-rency; and (c) simplify reconciliation requirements for foreign registrants(Journal of Accountancy 1995).

Any foreign issuer seeking to sell or list securities in the U.S. capital marketsis required by the SEC to provide a restatement or reconcilia~on of its ~nan~ialstatements to US. GAAP. The SEC has been under pressure from the NYSE andforeign companies to accept registration statements from foreign companies usingtheir local GAAP financial statements. The SEC argues that the U.S. accountingand disclosure systems set the minimum standard for reporting and any compro-mise would jeopardize the entire system by decreasing the protection to U.S.investors (Sack et al. 1995). This posture imposes additional costs on non-U.S.issuers and some are not willing to bear these costs (Choi and Levich 1991a, 11).This requirement is a powerful disincentive to non-U.S. issuers for listing theirshares on U.S. markets. It is understandable that foreign corporations oppose rec-onciling their financial statements to U.S. GAAP. Foreign corporations believereconciliation is confusing to investors, to . . . tax authorities and politicians andto the issuers various other constituencies. In addition, [foreign corporations]believe the quantitative reconciliation requirement unde~ines the credibility oftheir published financial statements in their home country (Longstreth 1994, 90).Ignoring the issue of international diversity is forcing capital market business off-shore-to London, Frankfort, Tokyo and elsewhere (Cochrane 1992).

It has been suggested that the SEC should exempt the so-called world-classnon-U.S. companies from reconciliation requirements for listing in U.S. marketsin order to maintain the U.S. markets position as the leading capital market centerin the world and to keep pace with capital market growth (Cochrane 1992; Long-streth 1994). The proposal would allow world-class foreign issuers-defined bysize of revenues, market capitalization, and trading volume outside the U.S.-toregister securities with the SEC by following all of the SECs disclosure require-ments except for the reconciliation requirement. Under this proposal, the localfinancial statements would be accepted for a U.S. capital market listing if thecompanies include a written (n~ative) explanation of the material differencesbetween local accounting practices and U.S. GAAP in lieu of the quantitative rec-

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174 INTERNATIONAL ACCOUNTING, AUDITING TAXATION, 6(2) 1997

onciliation requirement (Cochrane 1992). The exemption would better protect theU.S. investors because they would be able to access securities of non-U.S. issuerson U.S. exchanges, and be protected by the securities laws of the SEC, rather thanparticipating on non-U.S. exchanges where investors incur additional costsbecause of foreign custody, clearance, and settlement arrangements (Cochrane1992).

The rationale behind the world-class proposal is that the reconciliation is notnecessary to protect investors. A study by Bhushan and Lessard (1992) concludedthat reconciliation is of less importance to professional investment managerswhen compared to more uniform disclosure. Since the cost of reconciliation isburdensome, emphasis on mutual recognition subject to minimum standards ofdisclosure and presentation would be more effective (Bhushan and Lessard 1992).The proposal to exempt world-class foreign issuers from reconciliation wasrejected by the SEC (Longstreth 1994).

Although maintaining its insistence on reconciliation to U.S. GAAP, theSEC has announced initiatives to (a) expand the availability of short-form pro-spectuses and shelf registration to more foreign companies; (b) streamline rec-onciliation requirements for certain items (e.g., requiring reconciliation of the twomost recent fiscal years for first-time foreign issuers rather than five years); and,(c) expand the range of companies eligible to use the multijurisdictional systemwith Canada (IASC 1993). Additionally, the SEC no longer requires foreign issu-ers that use IASs to provide reconciliations to U.S. GAAP with regard to theamortization of goodwill, the distinction between acquisitions and poolings ofinterests, and subsidiaries operating in a highly inflationary economy (IASC1995a).

Tosummarize,increasedcross-borderlistingshaveexertedpressureonnationalmarket regulators, in this example, the SEC, to simplify and harmonize accountingdisclosures and listing requirements. The dilemma facing national regulators is thatthey cannot bend the regulations for foreign companies without offering similar con-cessions t domestic firms. Responding to competitive pressure to attract foreign list-ings, national stock exchange regulators have made some progress towardaccommodating foreign issuers diverse disclosure systems, but may have uninten-tionally created another obstacle. The uneven pace at which harmonization effortsachieve acceptability across countries creates its own barriers (Wyatt 1992b). A coor-dinated multinational effort by representatives of national regulators focused on har-monization among capital markets is more likely to achieve the goal of cross-borderofferings and listings, and lead to more efficient allocation of resources.

Bilateral Level or Mutual RecognitionThe multijurisdictional disclosure system (MJDS) between Canada and the

U.S. is a good example of progress on coordination of accounting standards in the

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I nternational Accounting Standards in Captial Markets 175

capital markets on a bilateral level.3 The mutual recognition between the SECand Canadas Ontario Securities Commission acknowledges reciprocity for cer-tain large-size companies.4 According to the agreement, a company listed onexchanges subject to regulation by either Securities Commission may satisfy thecross-border listing requirements by providing the same registration documentsfiled with the home country. The objective of the MJDS agreement is to facilitatecross-border offerings in Canada and the U.S. by reducing the burden of disclo-sure for new securities issues. Although it appears that issuing expenses are lowerin cross-border listings as a result of the MJDS agreement, differences remain inthe respective GAAP and corporate disclosure practices of the two countries.

The mutual recognition concept appears simple-market regulators of differ-ent countries engage in negotiations seeking mutual recognition of each othersaccounting standards to facilitate multinational offerings. However, in somemutual recognition agreements between two countries, it is not only the regulatorswho are involved in the negotiation process. Other constituents who are affectedby the mutual recognition are also actively involved in arriving at the final agree-ment. As such, the consensus building resulting from negotiations can be alengthy process. The MJDS, for example, took more than two years of intensedebate among all of the concerned parties-investors, issuers, securities dealers,lawyers, and the regulatory bodies of the two countriesAespite the fact that dif-ferences in accounting standards and disclosures between the U.S. and Canada arerelatively minor (Fisher 1994). Negotiations between two countries with moresignificant differences in accounting systems could be more lengthy and more dif-ficult to accomplish.

Cooperation between the standard-setting organizations in the U.S. and Can-ada (with an observer from the Mexican Accounting Principles Commission) isapparent by the current progress on the joint project on disaggregated data disclo-sures. Similar standards on disaggregated data disclosures already exist in State-ment of Financial Accounting Standard No. 14 and Canadian Institute ofChartered Accountants Handbook Section 1700. Users in both Canada and theU.S. had requested more detailed information regarding disaggregated data dis-closures. Since the need to reconsider the extent of disclosures required in finan-cial statements of both countries arose simultaneously, the FASB issued anInvitation to Comment jointly with the Accounting Standards Board (AcSB) of theCanadian Institute of Chartered Accountants (CICA) (FASB 1995). The resultingdocument was the first step in a joint standard-setting project that will attempt todevelop common standards on disaggregated disclosures by sharing the writtenresponses and resulting analyses in addition to joint public hearings. The tentativeconclusions of the FASB and the AcSB were distributed for exposure and com-ment in January, 1996. The FASB Exposure Draft is identical to the CanadianExposure Draft except for differences in the scope of the standards, the effects ofdifferences in GAAP between the two countries in other areas, and differences in

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terminology and style (CICA 1996). The AcSB proposed that the Canadian stan-dard should apply to public enterprises and all co-operative business enterprises,deposit taking institutions and life insurance enterprises, whereas the U.S. stan-dard would apply only to public enterprises (CICA 1996).

Although bilateral cooperation between Canada and the U.S. is well-devel-oped, it must be remembered that the cultural and economic ties between the twocountries have resulted in strikingly similar disclosure standards and goals. Bothsystems have the primary goal of investor protection through well-developedrequirements for capital markets and have reliable methods for enforcing therequirements. The nature of the global capital markets may force other countriesto follow suit but not without considerably more effort and time commitmentsince accounting systems, as well as economic and political systems, are morediverse among other countries.

Regional LevelRegional cooperation in narrowing differences in accounting standards is

driven by increased economic cooperation and reductions in regional trade barri-ers. Attempts at accounting harmonization by organizations such as the AfricanAccounting Council (AAC), the Association of Southeast Asian Nations(ASEAN), the North American Free Trade Agreement (NAFTA), and the Euro-pean Union (EU) enhance foreign investment, regional commerce, and businesscooperation. The objectives of regional cooperation include (a) increasing the freemovement of goods, labor and capital, (b) eliminating or reducing trade barriers,and (c) harmonizing accounting reporting requirements on the respective coun-tries stock exchanges.

Among the developing nations, AAC and ASEAN are examples of regionalbodies that, among other things, have attempted to harmonize accounting stan-dards among its member states. The AAC was established in 1979 with the aim ofcoordinating accounting standards among African nations. After the AACreceived official recognition as a specialized organ of the Organization of AfricanUnity, expectations were heightened that the body would exert some influence inharmonizing accounting systems among African nations. However, the AAC hasnot made any significant progress to date. The body is largely composed of publicsector accountants who have little influence over the regulation of accountingmatters in their respective countries. The council has no technical staff and haslargely been inactive, meeting only on a very sporadic basis (Wallace 1990b).

A regional body that has received increasing attention is ASEAN, a regionalpolitical and economic alliance comprised of Brunei, Indonesia, Malaysia, thePhilippines, Singapore, Thailand, and Vietnam. Formed in 1967, the groups goalis to create a strong economic alliance culminating in an ASEAN Free TradeArea. Consistent with this goal, the ASEAN Federation of Accountants (AFA), an

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I nternational Accounting Standards in Caphhl Markets 177

organization of the professional accounting bodies of the ASEAN member states,initially devoted resources and time to regional harmonization of accounting stan-dards among its member states. However, cognizant of the institutional differ-ences that exist in its member states and the strong influence of internationalaccounting standards on domestic stand~d-setting in most ASEAN countries, theAFA has de-emphasized its vision of regional harmonization of accounting stan-dards. The AFA is now concentrating on promoting regional cooperation onissues such as accounting education and development of training and professionalstandards for accountants in ASEAN countries (Saudagaran and Diga 1997).

Among the Western developed nations, NAFTA and the EU are examples ofregional alliances that are seeking to coordinate accounting standards among itsmember states. In the wake of NAFTA, the accounting standard setting bodies inCanada, Mexico, and the U.S. have completed a joint study to analyze the similar-ities and differences in the three countries accounting standards and financialreporting practices. The impetus for this joint study was necessitated by NAFTAsobjective of eliminating or reducing tariffs and other trade and investment barriersin order to unify the three countries as a single trading block (CICA et al. 1995).In addition to analyzing the similarities and differences among accounting stan-dards, the objectives of the study also included identifying areas where progresstoward harmonizing these standards could be made, and providing users of finan-cial statements with information that will enhance their ability to compare compa-nies in the three countries (CICA et al. 1995). Although each country has regionalinterests, they are committed to support the IASC in its attempt to harmonize theaccounting standards globally. All three countries agree that harmonizationshould occur under the leadership of the IASC.

The most visible progress in h~onizing accounting standards at theregional level has been the European Unions (EU) efforts to harmonize theaccounting and disclosure requirements of member states. Accounting require-ments in the EU are contained in the accounting directives issued by the EuropeanCo~ssion (commission). The Fourth and Seventh Directives allow for mutualrecognition on the basis of minimum rules combined with options. Each memberstate implements the directives into their national law with the flexibility availablein the directives to mold the implementation according to national tradition. Theobjective of the comp~ability of financial info~ation is effected through addi-tional disclosure in notes to the financial statements {Van Hulle 1993).

Moreover, the EU has passed three directives, the Admission, Listing, andInterim-Reporting Directives, to harmonize minimum listing and filing require-ments of EU stock exchanges (Tondkar et al. 1990). The Admission Directivespecifies minims conditions for admission of securities to official exchange list-ing in member states and minimum filing requirements for listed firms. The List-ing Directive specifies the minimum listing particulars necessary for listing on anexchange in a member state to ensure that comparable information is provided.

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The objective of the Interim-Reporting Directive is to protect investors by provid-ing regular information of listed companies by half-yearly reports.

Under the three directives, both EU and non-EU companies will be able tosimultaneously list on EU stock exchanges without additional significant cost andtime commitments. For example, Skandia Group, a Swedish insurance company,was one of the first corporations to achieve multiple listing on EU exchangesunder the new rules. In 1990, Skandia simultaneously listed on the CopenhagenStock Exchange and the International (London) Stock Exchange using the sameprospectus. Johan Bergenstjerna, chief legal officer of Skandia, estimates that thecompany incurred only one-fifth of the cost of a normal London exchange listingbecause of the multiple listing. Another Skandia source estimates that the multiplelisting resulted in a savings of around 1.86 million (Corporate Finance 1990).What distinguishes the successful EU harmonization effort from efforts ofother regional organizations is the EUs ability to issue directives which are bind-ing on member states. Pronouncements of other regional bodies are only recom-mendations. Additionally, the EU accounting harmonization effort is part of theencompassing EU economic integration program. Therefore, it is doubtful that thesuccess of the EU accounting harmonization program, as it relates to the capitalmarkets, can be duplicated by other regional groups in the near future.

Regional efforts at harmonization, including bilateral efforts, are more likelyto succeed (1) when working between two countries where the accounting andreporting systems are similar, e.g., Canada and the U.S.; and/or (2) when thecountries within a region desire the benefits of economic integration, e.g.,NAFTA and the EU. The success of regional harmonization have been significant,but the extent of success is limited to the number of members in the regionalgroups and the exclusivity of the groups. The European Commission issues direc-tives which facilitate an EU firm when listing on EU stock exchanges, but thedirectives are irrelevant if the firm is contemplating listing on non-EU stockexchanges. In fact, some have contended that regional harmonization could effec-tively build trading (goods and investments) fortresses, creating economic advan-tages for the members of the group but disadvantages for trading outside thegroup. The ultimate goal should be globalization of capital markets, not subsets ofcapital markets.

International LevelHarmonization of accounting standards at the international level is rapidly

gaining momentum due to the growth in capital markets spurred by technologicaladvances in communications and gradual deregulation of national capital markets.The major players promoting harmonized standards are two international bodies:The International Accounting Standards Committee (IASC) and the InternationalOrganization of Securities Commissions (IOSCO).

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In 1973 professional bodies of accountancy from various countries formedthe IASC, an independent private-sector body. Composed of representatives of116 professional accounting bodies from 86 countries, the IASCs objectives are:

1. to formulate and publish in the public interest accounting standards to beobserved in the presentation of financial statements and to promote theirworldwide acceptance and observance; and

2. to work generally for the improvement and harmonisation of regulations,accounting standards and procedures relating to the presentation of finan-cial statements (AICPA 1996).

As the recognized body for the development of International Accounting Stan-dards (IASs), the IASC has issued 32 standards, of which two have been super-seded. Furthermore, ten standards have been significantly revised through theIASCs Comparability/Improvements project which resulted in promoting thecomparability of financial statements prepared in accordance with IASs. Theadoption of IASs by the member countries is on a voluntary basis. Thus, the IASClacks the enforcement power to require member countries to adopt its standards.

IOSCO was created in 1974 in an effort to stimulate cooperation betweenNorth and South American securities regulators. It became an international orga-nization in 1984. IOSCO is a private-sector organization established with the goalof influencing the development and regulation of the capital markets worldwide.The influence of IOSCO emanates from its membership of over 90 organizationsthat include securities regulators from over 50 countries. IOSCO supports thecommon prospectus approach, also known as the multinational prospectusapproach, which seeks to develop a single disclosure document that would beacceptable for listing and filing in all participating capital markets. IOSCO doesnot develop its own accounting standards to be used in the preparation of financialstatements for inclusion in a multinational prospectus. However, IOSCO has indi-cated its acceptance of IASs, under certain conditions, to be used in the prepara-tion of a multinational prospectus. A multinational prospectus which includesfinancial statements prepared in accordance with one set of GAAP would signifi-cantly reduce the barriers to multinational securities offerings (IOSCO 1989). TheInternational Federation of Stock Exchanges (FIBV), an international organiza-tion of stock exchanges with members from over 35 countries, has endorsedIOSCOs efforts to develop a multinational prospectus.

Combined Efforts of IASC and IOSCO and Recent DevelopmentsIOSCO has recognized IASC as the appropriate organization to formulate

accounting standards. Since securities commissions have the power to enforce

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accounting requirements, IASC has sought the cooperation of securities regulatorsworldwide to support the adoption of national accounting requirements that con-form to IASs. Many regulators already support the approach. IOSCO has indi-cated that if the IASs issued by the IASC are of sufficient quality, it will urge itsmember countries to permit the inclusion of financial statements consistent withIASs in cross-border offerings and listings as an alternative to the use of nationalaccounting standards (Carsberg and Sharpe 1996). The endorsement and contin-ued support of IASC by IOSCO has been a major boost to the efforts of IASC toimprove existing IASs and develop new IASs. IOSCO is playing a major role inmaking IASs effective by encouraging its member stock exchanges to recognizeIASs and by advising the IASC on the probable acceptability of standards (Thorelland Whittington 1994)6.Originally, some of the IASs allowed users the option of alternative account-ing principles to accede to countries that followed different national standards. Inorder to enhance the comparability of statements, IASC launched the Comparabil-ity/Improvements Project which significantly reduced the number of acceptablealternatives allowed under existing IASs. IASC hopes that the significantimprovement in the quality of IASs will set the stage for adoption of IASs by cap-ital market regulators for multinational company registrations. This hope isclearly shared by many multinational corporations. In a survey of 278 major mul-tinationals conducted by Touche Ross International (now Deloitte & Touche) in1990, most respondents agreed that the greatest potential benefit from the harmo-nization of accounting and auditing standards would be that stock exchangesaround the world would accept one set of financial statements prepared in accor-dance with a set of internationally accepted accounting standards (Journal ofAccountancy 1990).

Efforts of the IASC and IOSCO have focused recently on allowing compa-nies to list their securities on any foreign stock exchange with one set of financialstatements that conform to international accounting standards and are acceptableto IOSCO. An agreement between IOSCO and IASC would offer numerous bene-fits to companies and investors. Currently, multinational companies can choose toraise capital in any of several countries but incur large costs to comply with differ-ent national standards. Those costs could be reduced significantly if companiesdid not have to collect information for reconciliations or provide two sets of finan-cial statements. Investors will benefit by receiving high quality financial state-ments containing relevant and reliable information for comparison of investmentopportunities worldwide.

In 1993, IOSCO agreed to a list of core standards for use in financial state-ments of companies involved in cross-border listings. IOSCO recently hasendorsed the use of the international accounting standard on cash flow statements(IAS 7), a key component of the core standards. Companies using this intema-tional standard will meet the requirements of foreign regulators for cash flow

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nternufiona ccount Standards in Captti Markets 181

EXHIBIT 1Status of international Accounting StandardsZASNO Ti d eo f IAS Accepted by IOSCO Yes No

91011121314151617181920212223242526272829303132 -

Disclosure of Accounting Policies No I.2Inventories YesConsolidated Financial Statements (superseded)Depreciation AccountingInformation to be Disclosed in Financial StatementsAccounting Responses to Changing Prices (superseded)Cash Flow StatementsNet Profit or Loss for the Period, Fundamental Errors andChanges in Accounting PoliciesResearch and Development CostsContingencies and Events Occurring after the BalanceSheet Date

YesYes

No3NoConstmction ContractsAccounting for Taxes on IncomePresentation of Current Assets and Current LiabilitiesReporting Financial Information by SegmentInformation Reflecting the Effects of Changing PricesProperty, Ptant and EquipmentAccounting for LeasesRevenueRetirement Benefit CostsAccounting for Government Grants and Disclosure ofGovernment AssistanceEffects of Changes in Foreign Exchange RatesBusiness CombinationsBorrowing CostsRelated Party DisclosuresAccounting for investmentsAccounting and Reporting by Retirement Benefit PlansConsolidated Financial Statements and Accounting forInvestments in SubsidiariesAccounting for Investments in AssociatesFinancial Reporting in Hyperinflationary EconomiesDisclosures in Financial Statements of Banks and SirnibFinancial Institutions

YesNNd 112No

Not considered by IOSCOYesNO3YesNo3YesYesYesYesYesNo

Not considered by 10X0YesYesYes

Not considered by IOSCOFinancial Reporting of Interests in Joint Ventures YesFinancial Instruments: Disclosure and Presentation Not considered by IOSCO

Norex: * Status of IAS 4, Depreciation Accounting, could not be obtained. The standard is currently under revision by the IASC.* The standard is pan of the project Presentation ofFinancialStatements.The standard will be revised as scheduled in the work planSource: Correspondence (January 19, 1996) with IASC based on information from IOSCO

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statements. In addition to IAS 7, 14 other existing IASs (a total of 15) have beenaccepted by IOSCO (Exhibit I). Currently, IASC has added to its work programthose core standards which are not presently acceptable to IOSCO.At IOSCOs annual meeting in Paris in July 1995, IOSCO and the IASCannounced an agreement on a work program between the two org~izations.Commenting on the agreement, Sir Bryan Carsberg, IASC Secretary-General,said, We are now on the brink of achieving a new kind of status-the status thatcomes from having the IOSCO endorsement (IASC 1995b). IOSCOs technicalcommittee has agreed that successful completion of the work program will resultin international accounting standards representing a comprehensive core set ofstandards. The technical committee could then recommend endorsement of thestandards for cross-border capital raising and listing purposes as an alternative tothe use of national accounting standards in all global markets by the end of 1999.Chairman of IOSCOs Technical Committee, Ed Waitzer, commented thatIOSCO is committed to working with IASC to ensure a successful completion ofthe work [program] on a timely basis (IASC 1995b).

An accelerated work program with a target date of March 1998 was laterapproved by the IASC Board at its March 1996 meeting in Brussels (IASC1996a). International companies have indicated their desire to use IASs for report-ing purposes as soon as possible. Moreover, encouragement to accelerate the workprogram came from members of 10X0, including the European members, theCanadian member, and the U.S. SEC (IASC 1996a). The Board also invitedIOSCO to attend Board meetings through 1997 as a non-voting observer, andinvited the International Auditing Practices Committee and the Public SectorCommittee of the Intemationai Federation of Accountants (IFAC) to join theIASC Consultative Group (IASC 1996b).

Additionally, several other recent developments have elevated the status ofIASC and enhanced the possibility of the acceptance of the IASs for cross-borderlistings. For example, new members added to the IASC Board in 1995 includedmembers of several national standard-setting bodies, such as the chairman of theUnited Kingdoms Accounting Standards Board, the former chairman of the Cana-dian Accounting Standards Board, the president of Indias Institute of CharteredAccountants, and a member of the Australian Accounting Standards Board(Schwartz 1996). The addition of these members will strengthen the IASC byincreasing the Boards expertise and experience level while enhancing communi-cations among national standard setting bodies and IASC. The Board also addedtwo new members representing business: the Federation of Swiss Industrial Hold-ing Companies and the Intemational Association of Financial Executives Institutes(IASC 1996d). These two new members, along with the current business member,the International Co-ordinating Committee of Financial Analysts Associations,wil1 make the Board cognizant of the interests and concerns of their constituencies.

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Furthermore, the European Commission has endorsed the IASCs interna-tional harmonization process. The EUs accounting directives have been success-ful in raising accounting standards in the EU and improving the comparability offinancial statements in cross-border listing on EU securities exchanges. At thepresent time, however, European companies seeking capital outside Europe haveto prepare a second set of financial statements or reconcile their financial resultsto the GAAP of the country of listing. Preparing either a second set of financialstatements or a reconciliation is a costly process which confuses users and consti-tutes a competitive disadvantage for European firms (Commission 1995).

In order to enable large European companies seeking cross-border listingoutside the EU with only one set of consolidated statements, the EU consideredseveral options (Commission 1995; IASC 1996~). The option chosen was toendorse the IASCs efforts at harmonization because only the IASC is likely toproduce standards which would meet the needs for harmonization within a reason-ably short time period (Commission 1995; IASC 1996d). Moreover, IASs aredeveloped with European input to the Board, which includes representatives fromFrance, Germany, the Netherlands, the U.K. and the Nordic Federation (IASC1996~). The Commission believes that IASC offers the most efficient and timelysolution to the problem of EU companies seeking cross-border listing outside theEU. The above initiatives and cooperative efforts among various internationalorganizations have increased the possibility of having a multinational prospectusfor cross-border listing before the year 2000.

INTERACTIONS OF REGULATORY INITIATIVES AT DIFFERENTLEVELS WITH GLOBAL HARMONIZATION EFFORTSThe path to international harmonization should not be viewed as a linear pro-

cess with regulatory initiatives at the national, bilateral, and regional levels (sub-levels) as intermediate steps to international harmonization. While regulatory ini-tiatives at the sub-levels can contribute to harmonization, they may also detractfrom international harmonization efforts because existing regulations or new reg-ulatory initiatives may not be consistent with IASs. If inconsistent with IASs, theregulations may move the relevant unit of analysis (nation/nations/region) awayfrom international accounting standards.

At the national level, accounting requirements of a country may be inconsistentwith IASs. Such a situation will not arise if countries use international accountingstandards as the basis of national requirement. Several countries, such as Botswana,Brunei, Malaysia, Singapore, Thailand, andzimbabwe, use IASs as the basis of theirown national accounting standards. More recently, South Africa and Australia havedecided to bring all their national accounting standards in line with IASs. More sig-nificantly, the Japanese have agreed to support the IASs in the deregulatory package

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184 INTERNATIONAI, ACCOUNTINGS AUDITING TAXATION, 6(t) 1997

for the Japanese capital markets. The Tokyo Stock Exchange, for example, hasallowed issuers from Singapore and Hong Kong to furnish financial statements basedon domestic GAAP which is based on IASs in both countries (~j~u~cj~~ Times 1996).Harmonization efforts at the bilateral and regional levels may also have thepotential to be competitive rather than complementary to global harmonizationefforts. Harmonization efforts within clusters may be a more feasible strategy thanattempts to harmonize accounting standards on a worldwide basis (Choi 1981).However, cooperation among national standard setters and governments on aregional basis may be threatening progress towards internationalization and, spe-cifically, threatening the existence of the IASC and delaying the intemationaliza-tion of financial reporting (Denman 1994,7). As an example, a jointly developedstandard will be more difficult to supersede with a subsequent international actionthan a single-country standard. John H. Denman of the Canadian Institute of Char-tered Accountants personally commented that after he had worked with the FASBfor three years on disaggregated reporting, he would shudder at the thought ofgoing through it all again with, for instance, the European Union in another tenyears (Denman 1994).

As discussed earlier, the ASEAN Federation of Accountants (AFA) initiallypursued a policy of fostering regional ha~onization of accounting standards.After largely an unsuccessful attempt at achieving regional accounting harmoni-zation because of institutional differences among member countries, individualASEAN countries actively considered IASs as the basis for their national stan-dards.7 Currently, the ASEAN countries have de-emphasized their regionalaccounting ha~onization program and instead, embraced a global view ofaccounting harmonization (Saudagaran and Diga 1997).

The possible tension between regional and global harmonization efforts hasalso surfaced in the context of EU harmonization. As previously discussed, theEuropean Co~ssion specifically addressed this issue in its report titled,Accounting harmonisation: A new Strategy vis-a-vis International Harmonisa-tion (Commission 1995). In the report, the European Commission endorsed theIASCs international harmonization process. The EU seeks to preserve its ownachievements in the direction of h~onization while taking the necessary steps toensure that existing and future IASs are consistent with the accounting directives(Commission 1995).

To deal with the urgency of cross-border listings for European firms, the Com-mission will determine whether the IASs conform to the accounting directives. Thefocus will be on consolidated financial statements because of their relevance forcross-border listing. The Commission has determined that IASs are not directlytransposable in all member states because of the linkage between accounting and tax-ation in some member states (Van Hulle 1993). If the IASs conform to the accountingdirectives, then the member states will analyze the IASs t determine if they conformto their national law. If there are inconsistencies, the issue will be resolved on a case-

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by-case basis between the IASC and the Commission (Commission 1995; IASC1996~). Far from abandoning its accounting harmonization efforts, the EU isstrengthening its commitment and contribution to the international standard-settingprocess by supporting the efforts of the IASC which appear to offer the most efficientsolution to companies operating worldwide (Commission 1995; IASC 1996~).

A more recent challenge to the IASC has come from the G-4 group, a previ-ously informal working group of Australian, Canadian, U.K., and U.S. standardsetters.* Although the group supports international harmonization of accountingstandards, it is critical of the IASC, and, in particular, the process of internationalaccounting standard-setting. Among its criticisms of IASC are the lack of timespent on educating board members on the issues being debated, limited researchon issues being considered, limited due process, and undue influence of countrieswith limited technical input or expertise. While the group, so far, has restricted itsactivities to publishing monographs on contemporary accounting issues, somecontend the group is seeking to influence the IASC to create an inner chamber thatwould deal with the complex accounting issues to be later endorsed by the othermembers of the IASC board. A more startling scenario is that the group mightseek to develop and promote international accounting harmonization independentof the IASC (Kelly 1996).

The potential for tension and discord between regulatory initiatives at thesub-levels and global harmonization efforts will always exist. When such tensionsheighten, they may slow or even deter progress on global accounting standards.The advocates of global harmonization assert that the harmonization effortsachieved across countries at an uneven pace may create barriers to internationalglobal harmonization (Wyatt 1992b). However, others argue that harmonizationefforts at the sub-levels may be complementary rather than competitive with glo-bal harmonization of accounting standards. Furthermore, tensions between thesub-levels and global harmonization efforts may also serve as a monitoring sys-tem that can raise valid concerns in the international harmonization process. Forexample, the IASC has formed a working group to explore ways to improve itsdue process system, partly, in response to concerns expressed by the G-4 group.Therefore, in one sense, friction among sub-level organizations and the IASC hashelped inject discipline and accountability into the international accounting har-monization process. Ultimately, the success of the international harmonizationmovement depends on how well the IASC manages and responds to such chal-lenges.

UNRESOLVEDISSUES ANDCHALLENGESAssuming that IOSCO endorses the IASs which emerge from the accelerated

work program, there still remain several unresolved issues. The first issue

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186 INTERNATlONAL ACCOUNTING, AUDITING TAXATION, 6(2) 1997

involves identifying the appropriate auditor for the attestation function, Auditing amultinational prospectus and accompanying financial statements intended forcross-border listing will require attesting that IA% have been followed and appro-priate disclosures made. Auditors are educated, trained, and certified according tothe requirements of the accounting profession in their home country. Knowledgeof international accounting standards has not been a customary curriculumrequirement. However, if the IASs are completed by March 1998, as indicated inthe accelerated work program, and approved by IOSCO shortly thereafter, thisissue should be receiving priority attention. It is probable that internationally rep-utable auditing firms will perform the attestation task for multinational corpora-tions seeking cross-border listing.

The second unresolved issue is determining if a corporation seeking to list ona foreign stock exchange is, in fact, eligible to list according to the stockexchanges requirements. For example, in the U.S., the SEC provides the reviewfor listing on the NYSE. Which regulatory power will determine if all of IOSCOsrequirements have been met and all specified items included? Without a world-wide regulator representing IOSCO, it is logical to delegate that function to theregulatory agency representing the member stock exchange of IOSCO. Theseagencies currently review qualifications of each corporation to determine if theyare in compliance with the requirements of the particular stock exchange. Thesame agency could determine compliance with IOSCOs requirements for cross-border listings. A mutual recognition process among stock exchanges woulduphold IOSCOs endorsements.

The third unresolved issue is that once IASs are accepted, who would beresponsible for interpreting the IASs in case of conflict? Xf inte~retation of IASsis left to national standard setters and/or regulators, the potential exists that differ-ent interpretations of IASs may emerge in different countries. This would detractfrom harmonization. Consequently, the IASC has decided to establish a system ofinte~retation for its own standards (IASC 1996e).

SUMMARY AND CONCLUSIONThe growing importance of IASs and increased international cooperation

among standard-setters and capital market regulators were motivated by the need forefficiencies in international capital markets. The reduction of trade barriers, inter-nationalization of companies, deregulation of capital markets, and growth of coop-erative ventures have led to an increased aw~eness of the inefficiencies arising fromthe diversity in accounting practices across countries. Continuously increasinggrowth in international capital markets demands relevant and reliable financial infor-mation to facilitate the comparison of investment opportunities worldwide.

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in ternational Accounting Standards in Captial Markets 187

The most desirable and most feasible option must be ferreted out of the har-monization attempts by numerous organizations and at various levels. The need isapparent for a mechanism that requires companies to follow a set of agreed-uponstandards regardless of the choice of capital market. Although no internationalmechanism exists for enforcing an international body of accounting standards,international efforts require some exertion of power for conformance (Wyatt1992b). IOSCO is the most likely organization to enforce conformance. WhileIOSCO does not have international jurisdiction, its representatives have signifi-cant influence in their respective countries over the orderliness of capital markets.Implementation of joint initiatives adopted by IOSCO [and IASC] can have sig-nificant effect (Wyatt 1992a, 66).

IOSCO supports a multinational prospectus approach, recognizing that dif-ferent national accounting requirements are a primary impediment to multina-tional securities offerings and other foreign listings. But IOSCO does not developits own accounting standards. Which organization should develop internationalaccounting standards for preparation of financial statements for inclusion in amultinational prospectus? The IASC has established a due process in which repre-sentatives from accounting professions from various countries participate andoffer their expertise, experience, and resources. IOSCOs acceptance of IASs inthe preparation of financial statements for inclusion in a multinational prospectuswould overcome, in part, the problem of accounting diversity while facilitatingcross-border offerings.

NOTESI. Although there is an active debate concerning the need for international harmonization, a dis-

cussion of the various viewpoints is beyond the scope of the present paper. This study isrestricted to reporting on the progress of harmonization utilizing International AccountingStandards (IASs) in capital markets. The arguments for the use of a set of internationalaccounting standards in capital markets is predicated on the beliefs that accounting diversitycreates problems for capital market users, and international harmonization would facilitateinternational capital market transactions.

2. The distinctions made in this paper between harmonization efforts at the national, bilateral,regional, and international levels are only to facilitate discussion and should not be viewed asa linear process with national, bilateral, and regional harmonizations as intermediate steps tointernational harmonization. National/bilateral/regional initiatives can, in fact, move theaccounting regulations of a country(ies) away from international standards. This situation canarise, for example, when national/bilateral/regional regulations are inconsistent with intema-tional standards. This possibility is explored in greater detail in a separate section entitled,Interactions of Regulatory Initiatives at Different Levels with Global HarmonizationEfforts.

3. Another example of a successful bilateral agreement is the one between Australia and NewZealand. For an excellent discussion on the bilateral cooperation between the two countries.see Rahman et al. (1994).

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4.

5.6.

I.

8.

Mutual recognition agreements can also exist among more than two countries, i.e., multilateralagreements. Since we are not aware of any recent formal multilateral agreements in account-ing, we focus on the bilateral level. Regional harmonization initiatives which may take theform of multilateral agreements are discussed in the next section.For an excellent, thorough discussion of the politicalization of standard setting by IASC, itssurvival strategies and management of its external environment, see Wallace (1990a).See Thorell and Whittington (1994) for a discussion of the roles of the EU, the IASC, andnational standard setters in the process of international harmonization, including the institu-tional framework. Additionally, for a discussion of the institutional history of IASC and theunderlying processes, particularly the influential role of the SEC, through IOSCO, on IASC,see Hopwood (1994).Five of the seven ASEAN countries, Brunei, Indonesia, Malaysia, Singapore, and Thailand,use IASs as the basis for their national standards. The Philippines, reflective of their historicalantecedents, follow U.S. GAAP while Vietnam is considering adopting IA& as one option indeveloping its accounting system.The group was formed in 1992 and originally had five members (G5). The Netherlands, one ofthe original members, subsequently dropped out of the group. The group is also sometimesreferred to as G4 + I because the IASC has observer status in the group.

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